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Aug302016

Franchise 101: Non-Compete Agreements & Projected Earnings

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com

 

August 2016

 

Franchise Lawyers

FRANCHISOR 101:
Non-Competes for Franchisees’ Employees

A "non-compete" provision limits the franchisee's ability, after the franchise agreement ends, to continue to work in a similar type of business to the franchise within a certain time period and geographic area. The purpose is to protect the franchise system for a time against a competitor who "knows the system from the inside." Non-compete provisions are often disfavored by courts. What about non-compete agreements for the employees of franchisees?

Until recently, Jimmy John's, a franchisor of sandwich shops, provided its franchisees with sample non-compete agreements for franchisees to use with their own employees, including order takers, sandwich makers, and delivery drivers. The agreements stated that, for two years after leaving employment, a former employee could not work at any business within a 2-mile radius of a Jimmy John's location if that business made more than 10 percent of its revenue from sandwiches.

However, last June Illinois Attorney General Lisa Madigan filed suit against Jimmy John's to stop this imposition of "unlawful" and "highly restrictive" non-compete agreements on its low-wage workers. Illinois requires that non-compete agreements be "premised on a legitimate business interest and narrowly tailored in terms of time, activity, and place." The complaint alleges the agreements lock these employees into their jobs and prevent them from seeking higher-paying jobs elsewhere, while giving their employers no reason to increase their wages or benefits.

Shortly thereafter, New York Attorney General Eric T. Schneiderman announced that his office reached a settlement with Jimmy John's regarding the agreements, stating that "Non-compete agreements for low-wage workers are unconscionable." Under the settlement, the franchisor will stop providing the sample agreements to its New York franchisees and will also inform those franchisees that the Attorney General considers such agreements unlawful and void.

In light of these developments and other negative publicity that non-compete agreements for workers have received, franchisors that provide such agreements for their franchisees' use may want to consider whether or not they are enforceable, and whether such agreements constitute good business practice.

FRANCHISEE 101:
How Far Do Earnings Projections Go?

A franchisor is allowed to make "financial performance representations" in its disclosure documents. These figures may project how much money a franchisee is likely to make and can play a critical part in the franchisor's sales process. But if the numbers are way off, what kind of legal recovery can the franchisee get?

In Legacy Academy, Inc. v. Doles-Smith Enterprises, Inc., a Legacy Academy ("Legacy") franchisee suffered losses during the first 3 years of operating its daycare franchise. The franchisee sued, claiming that Legacy had misrepresented the projected cash flow of its franchises in the Franchise Offering Circular they provided to the franchisee. At trial, the franchise owners showed that they paid $40,000 for the franchise and took out $200,000 in loans to cover start-up expenses before the daycare was operational. They also testified that they lost their life savings in order to keep the daycare operational while it lost money. The jury agreed and awarded the franchisee $390,000 in damages.

However, an appeals court found the franchise owners failed to present evidence of damages necessary to receive an award. The court explained that the owners certainly could not recover the difference between what their business made and what the Offering Circular projected because the figures given were only a projection - not a guarantee.

The owners may have been able to recover their costs to buy and start the business - the $40,000 franchise fee and $200,000 in loans - had they asked to "rescind" the franchise agreement: to be put back into the financial place they were before they signed the agreement. But instead, the owners asked for all of the damages they suffered as "consequences" that flowed as a result of the franchisor's misrepresentation. The court concluded that only the owners' ongoing losses due to operating the franchise qualified as such consequential damages. But testimony the franchise owners gave about those particular damages - the "loss of their life savings" - was so vague that a jury had to speculate what the fair recovery should be. Therefore, the appeals court reversed the jury verdict and found in favor of Legacy.

In light of these developments and other negative publicity that non-compete agreements for workers have received, franchisors that provide such agreements for their franchisees' use may want to consider whether or not they are enforceable, and whether such agreements constitute good business practice.

 

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2016. All Rights Reserved.

Wednesday
Jul272016

Franchisor 101: DBO re Outdated FDDs & Unregistered Franchises; and Domino's Delivered NY Wage Theft Claims 

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
gwintner@lewitthackman.com

 

July 2016

 

Franchise Lawyers

David Gurnick in The Franchise Lawyer

 

”Franchise systems can build anti-terrorism measures into their systems, in ways that make business sense and align with their legal and moral principles..."

Click to read: Franchise Systems’ Roles in Combatting Terrorism 

 

FRANCHISOR 101:
Outdated FDDs and Unregistered Franchises

The California Department of Business Oversight ("DBO") recently issued three Orders against franchisors for violating California's franchise laws.

 No Good Deed

 

#1: Senior's Choice provides companion care services to seniors. In 2013 Senior's Choice renewed their franchise registration and disclosed the initial franchise fee was $45,000. Then they provided a prospective franchisee an older Franchise Disclosure Document, stating an initial fee of $25,000 not $45,000.

The DBO found Senior’s Choice violated the law by:   

  • not providing the current FDD;

  • selling a franchise on terms that differ from the registered offer (by lowering the initial fee from $45,000 to $25,000); and

  • violating a prior Desist and Refrain order from 2007 for unlawfully selling franchises without registration.

The DBO ordered Senior Choice directors, officers and managers to attend training on franchise law compliance, pay a penalty of $7,500 and not further violate the Franchise Investment Law.

This case shows that the government objects even when franchisors act to benefit franchisees (by lowering fees) or accidentally provide the wrong FDD.

 

Brewer’s Remorse

 

#2: In the Great Khan case, the DBO found Great Khan and its principals sold unregistered franchises and issued an order prohibiting further violations. Great Khan obtained a franchise registration in 2001 but failed to renew the registration in 2002.

After expiration of the registration, Great Kahn sold five franchises to California residents. Each franchisee paid an initial fee of at least $25,000. Great Khan and its principals were ordered to Desist and Refrain from further offers or sales until their franchises were registered or exempt from the registration requirements.

#3: In a third case the DBO found World Coffee Kiosk (WCK) offered and sold franchises without registration. WCK sold a business in which the operator sold approved coffee drinks, food products and merchandise in an assigned territory from kiosks at malls. Additionally, the operator was required to use approved signage and advertising and operate under WCK's plan, manual, policies, standards and procedures. WCK could require an operator to relocate.

Operators paid an initial franchise fee of at least $25,000. The DBO found this was a franchise that was not registered or exempt. WCK was ordered to Desist and Refrain from further offers or sale of franchises until they registered or satisfied an exemption.

The Great Khan and World Coffee Kiosk cases show that failing to renew a registration or not registering at all can have serious consequences and penalties.

 

Domino’s Delivered NY Wage Theft Claims

 

In May, 2016, the New York Attorney General (AG) brought a claim against Domino's Pizza for labor code violations at three franchised locations.

The AG alleged failure to pay delivery workers the legal minimum wage and overtime, and failure to fully reimburse workers for delivery expenses - totaling over $567,000 in back wages and underpayments to workers, liquidated damages and interest.

The NY AG alleged Domino's is liable as a joint employer because it exercised a high level of control over employee conditions at franchised stores and had a significant role in causing wage violations; and that Domino's role was significant in hiring, firing, discipline, wage payments, and in oversight and supervision of work.

The franchisor allegedly caused many of the wage violations by encouraging franchisees to use a "Payroll Report" function in the software system Domino's specified for franchisees (called "PULSE"). The AG claimed Domino's knew, but failed to disclose, that PULSE's "Payroll Report" systematically under-calculated gross wages owed to workers.

The Domino's case shows that franchisors should be careful in exercising control over a franchisee's operations concerning hiring, firing and employee relations, and should carefully evaluate whether to assist with payroll software. These controls can lead to claims by the government and franchisees that the franchisor exercises control and is therefore liable for claims at franchised locations.

 

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2016. All Rights Reserved.

Thursday
Jun302016

Franchise 101: 68 Steps to Reduce Risk of Joint Employer Liability

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
gwintner@lewitthackman.com

 

June 2016

 

Franchise Lawyers

David Gurnick in The Franchise Law Journal

Regarding trademark disputes: "...it may seem to lawyers and courts that there is not a readily accessible legal lexicon to describe the sounds and appearances of words and phrases. However, this is a misconception."

Click to read: Technical Terms for Comparative Trademark Analysis 

FRANCHISOR 101:
Reducing the Risks of Joint Employer Liability

 

With the risk of franchisors being jointly liable for obligations to franchisee employees, and franchisees exposed to unionization of employees if their franchisor is a joint employer, we present this list of 68 steps every franchisor and franchisee can, and should consider to reduce the risk of joint co-employer liability.

These steps also build relations with customers, communities, employees and suppliers and can help improve and expand successful franchised businesses and systems. 

  1. Franchisor's entity name can be different than franchise brand.

  2. Franchisee's entity name can be different than franchise brand.

  3. Business card on counter can state franchisee's name and "independent franchise owner."

  4. Plaque in customer area can identify franchisee as independent franchise owner (with owner's photo).

  5. Local ownership and identity of independent franchise owner(s) can be promoted in the community.

  6. Franchisor can participate in national and regional associations, making sure to promote pride of independent ownership of franchise outlets.

  7. Franchisee owner can be active in local chambers of commerce and trade associations, making sure to communicate pride of independent ownership.

  8. Store-level customer receipts can state franchisee's entity name and "each location independently owned and operated."

  9. Store can use stationery that identifies independent franchise owner.

  10. Store level brochures can identify independent franchise owner.

  11. Franchise owner(s) can be present at store(s) daily or periodically, up front, with "owner" name tag, greeting customers.

  12. Store can display certificates of training, awards and honors identifying independent franchise owner.

  13. Each franchisee can be a corporation or limited liability company, not an individual.

  14. Local store advertising can state that location is independently owned and operated.

  15. Local advertising can include franchisee's name and photo.

  16. Media events and community public relations can discuss and show photos of all the local independent franchise owners.

  17. Franchisor's website can emphasize independent ownership, e.g., picturing the independent owner and providing a biography, with the link for each location.

  18. Franchisor's social media can explain independent ownership.

  19. Franchisor's social media can feature a rotating biography of each independent owner.

  20. Franchisee can educate its employees in new hire orientation as to nature of franchise relationship.

  21. Franchisee can educate its employees that they work for the franchisee.

  22. Back-of-store interior signs can remind employees they work for the franchisee.

  23. Business bank accounts and checks can bear franchisee's name, not franchisor's name or logo.

  24. Variations can be encouraged in store layout/design letting each franchise location look a little different while adhering to brand requirements.

  25. Franchisor can avoid instructing or directing franchisee's employees, but communicate to franchise owner.

  26. Employment application can state franchisee's name and note that applicant is applying to franchisee for employment.

  27. Franchisee can make its own hiring decisions.

  28. Franchisee can set its own employee compensation policies.

  29. Franchisee can make its own discipline and termination decisions.

  30. Franchisor can instruct field personnel to avoid advising franchisees on any employment matters.

  31. Franchise agreement can state parties' mutual intent that franchisee makes all decisions on firing, firing, compensation and disciplining franchisee's employees.

  32. Franchise agreement can state parties' mutual intent to be independent contractors.

  33. National and regional advertising and website can state "each location is independently owned and operated."

  34. Franchisor can remove from Operating Manual those controls or requirements that are not essential to protection and uniformity of the brand.

  35. Franchisor can provide training programs only for franchisee's supervisorial and managerial employees and require franchisee to train its staff.

  36. Franchisees can be free to purchase supplies from any source as to which standardization is not essential.

  37. Alternative supplier options can be provided to franchisees for supplies that are essential to brand.

  38. Franchisees can remind suppliers their customer is the franchisee, not the franchisor.

  39. Utility accounts can be in franchisee's name.

  40. Premises can be leased by the franchisee.

  41. Franchisee can do its own scheduling of employee working hours.

  42. Franchisee can set its own hours of operation.

  43. Franchisor can remove from franchise agreement all controls or requirements that are not essential to protection and uniformity of brand.

  44. Franchisee can have choices of several alternative uniform styles and dress codes.

  45. Franchisee can have some variation in goods and services offered per local preferences while still adhering to brand requirements.

  46. Franchisee can set own prices while still adhering to brand requirements per applicable law.

  47. Franchisee can consult its own legal counsel on questions about treatment of employees.

  48. Franchisees can have their own employment manuals and not use franchisor's.

  49. Franchisor can obtain EPLI insurance.

  50. Franchisor can require franchisees to obtain EPLI insurance.

  51. Franchise Agreement can require franchisees to indemnify franchisor for wage and hour and other labor and employment claims by its employees.

  52. Encourage franchisees to be active in community, support community events, speak to city council and legislative bodies, always noting independent owner status.

  53. Franchisor can provide franchisees pre-written news columns about the franchise, that franchisees can get published in local community newspapers.

  54. Product packaging can note independent ownership, and identify independent franchise owner(s).

  55. Franchisees can have their workers sign a disclaimer acknowledging which person/entity they work for.

  56. Franchisee's name can be stated when a live person answers franchisee's phone.

  57. Franchisee's recorded phone message can state franchisee's name.

  58. National and regional brand advertising can note each location is (or many locations are) independently owned and operated.

  59. Regional cooperatives in advertising, can state each location is independently owned and operated.

  60. Beyond disclaimers, weave fact of independent, local ownership into message, content and theme of brand advertising.

  61. On website's list of franchise locations, list owner's name with each location.

  62. Franchisees should file fictitious business name statement per state and local law.

  63. Franchisee's independent name should appear on both paycheck and separate stub the employee retains.

  64. Franchisor should not obtain or maintain records or files of franchisee employees.

  65. Franchisor can avoid operating at or from the same location as a franchisee.

  66. Franchisees can pay their liability, workers compensation and other insurance policy premiums on time and not let insurance lapse.

  67. Franchisees can employ one or more assistants or helpers.

  68. At annual franchise convention, remind franchisees of independent ownership.

  69. This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2016. All Rights Reserved.

Wednesday
May252016

States Protect Against Joint Employer Liability; and Combatting Franchisor's Harmful New Policies

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
gwintner@lewitthackman.com

 

May 2016

 

Franchise Lawyers

Barry Kurtz in The Business Journals

 

"...Is the business sustainable in the marketplace? To be sustainable, the business concept should be unique enough to withstand competition, and also...”

Click to read: Guidelines When Considering Buying a Franchise

IFA Legal Symposium

 

Barry Kurtz, David Gurnick and Tal Grinblat attended the International Franchise Association's 49th Annual Legal Symposium in Washington D.C. The conference provides an opportunity to gain insights into many of the legal challenges faced by franchisors around the world. This year's symposium featured Philip Miscimarra of the National Labor Relations Board, who spoke on the NLRB's recent decisions regarding joint employer liability.

 

FRANCHISOR 101:
State Bills re Franchisor Joint Employer Liability

With franchisors deeply concerned about joint liability for franchisee employees, more states are passing laws trying to prevent that from happening. Here are some states and measures that have passed:

Texas enacted Senate Bill 652, providing that: "[A] franchisor is not considered to be an employer of: (1) a franchisee; or (2) a franchisee's employees." 

Michigan passed House Bills 5070 - 5073, stating: "[A]s between a franchisee and franchisor, the franchisee is considered the sole employer of workers for whom the franchisee provides a benefit plan or pays wages." 

Utah passed House Bill 116, stating, "[A] franchisor is not considered to be an employer of: (i) a franchisee; or (ii) a franchisee's employee."  

Wisconsin enacted Act 203 stating: "[A] franchisor ... is not considered to be an employer of a franchisee ... or of an employee of a franchisee."

Indiana approved House Bill 1218, which provides: "a franchisor ... is not considered to be an employer or co-employer of: (1) a franchisee ... or (2) an employee of a franchisee." 

Georgia enacted Senate Bill 277, providing: "[N]either a franchisee nor a franchisee's employee shall be deemed to be an employee of the franchisor for any purpose."

The Virginia legislature attempted to pass House Bill 18, stating that "[N]either a franchisee nor a franchisee's employee shall be deemed to be an employee of the franchisee's franchisor." But, the governor vetoed the bill.

These state laws will not protect franchisors from all claims. For example, various claims based on federal law may not be affected. But passage shows which states are friendlier to franchises and want to retain and grow their franchise industries.

 

FRANCHISEE 101:
What to Do About Franchisor’s Harmful New Policies

Franchisees aren't always excited when their franchisor introduces a new policy. But if a new policy overreaches and might doom a franchisee's business, can it be stopped before it starts?

Automotive Technologies, Inc. ("ATI") is the franchisor of "Wireless Zone" stores. These stores sell Verizon Wireless cell phone products and services. The franchisor, ATI, received sales commissions from Verizon that it passed on to franchisees who made the sales. ATI also paid performance incentive payments ("PIPs") to franchisees when they sold certain phones. When ATI announced it would stop paying the PIPs or start taking a 5% royalty from commissions before passing them on, a group of franchisees sued. They claimed the new policy was a breach of contract, unjust enrichment, and unfair practice, and asked the court for a preliminary injunction to stop the new policy.

The court ruled that to immediately stop ATI from applying its plan, the franchisees had to show they would be irreparably harmed - that is, they would lose "substantially all of their businesses." Based on financial information from the franchisees, the court found they could suffer no more than a 2% loss of revenue from ATI's new policy, and were not at risk of losing their businesses. The court denied the preliminary injunction.

Franchisors and franchisees may disagree on what is best for a franchise system, and the wisdom of a particular course may be known only in time. The case shows that franchisees must meet a high bar before a court will cut off a proposed new policy implemented by the franchisor in good faith.

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2016. All Rights Reserved.

Friday
Apr292016

Joint Employer Liability: Wins, Losses, Lessons; and Understanding Merger/Integration Clauses

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
gwintner@lewitthackman.com

April 2016

 

Franchise Lawyers

FRANCHISOR 101:
Wins, Losses & Lessons in Joint Employer Liability

As joint employer liability continues to develop, plaintiffs seeking deep pockets continue to claim, with some success, that franchisors are joint employers, responsible for actions of their franchisees' employees. In April, a jury found Domino's Pizza (DP) liable for $10.1 million for a delivery driver's car accident that caused a man's death.

In the accident a franchisee's employee drove in front of an oncoming truck. The truck swerved, crashing into a median to avoid the DP driver. The truck driver was left quadriplegic and later died. The jury found that the delivery driver caused the accident, and that DP controlled the franchisee's operation enough to be liable. DP's attorney argued that DP did not control hiring or firing of the franchisee's employees.

But the plaintiff's attorney focused on overall control by DP, noting that it extended even to particular conduct of delivery drivers, like requiring them not to use radar detectors or carry more than $20 cash. The attorney persuaded the jury that the franchise agreement's description of the franchisee as an "independent contractor" was just an effort by DP to avoid this kind of liability, and did not describe the actual relationship, in which the franchisee was actually DP's agent.

Click to read: Wiederhold v. Domino’s Pizza, 2-11-CA-001589

By contrast, when an employee of a landscape service franchise sued the franchisee and franchisor for discrimination, harassment, and retaliation, the court found that the franchisor was not her employer and could not be liable. The court explained that the franchisor, Mountain View Lawn Care, did not exert control over the plaintiff's employment, since the franchisor did not:

1. Have the ability to hire or fire the plaintiff;
2. Supervise or discipline the plaintiff;
3. Provide the equipment or uniform used by the plaintiff;
4. Possess employment records for the plaintiff;
5. Train the plaintiff or any of the franchisee's employees;
6. Employ anyone with similar duties to the plaintiff's;
7. Receive the sole benefit of the plaintiff's work;
8. Do anything to show that it intended to be the plaintiff's employer.

Click: Wright v. Mountain View Lawn Care, LLC

Juries are less predictable, as shown by the Domino's Pizza case, but a franchisor can improve its prospects of avoiding joint employer liability by following the factors outlined in Mountain View.

FRANCHISEE 101:
Understanding Merger/Integration Clauses

Before a final agreement is signed there are often oral discussions, negotiations, and representations. There may be written memorandums of understanding or letters of intent. But, when the final agreement has a "merger" or "integration" clause, in many states it is as if anything that came before never happened.

After various disputes between Chrysler Group and its distributor in Greece, the parties entered into a settlement agreement. The agreement said the distributor would now sell only Chrysler's "Lancia" branded vehicles. Before they signed the agreement, Chrysler represented to the distributor that it planned to expand the Lancia line over the next few years. When that expansion didn't happen, the distributor sued Chrysler for fraud.

The settlement agreement did not mention expansion of the Lancia line but did have a "merger/integration clause." That clause said the agreement superseded all other agreements between the parties. As a result, regardless of any representations allegedly made by Chrysler, the court denied the distributor's claim.

A merger clause may resemble the following:

Entire Understanding: This Agreement contains all of the terms and conditions agreed on by the parties with reference to its subject matter. This Agreement supersedes and replaces all prior agreements, arrangements, negotiations, representations and understandings among the parties, whether written or oral, concerning its subject matter.

An agreement with a clause like this will be the last, and only, word on the subject in those states that give force to these clauses. Before signing an agreement that contains such a clause, be certain that the agreement also contains every part of the final deal as you understand it.

Details: Lancia Jeep Hellas S.A. v. Chrysler Group Int'l LLC, Mich. Ct. App.

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2016. All Rights Reserved.

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